Colorado Medicaid Expansion May Prove Costlier Than Expected

Colorado is currently considering whether to expand Medicaid under President Obama’s health care law, which radically restructures federal subsidy programs for medical care. The state has decided to create an ObamaCare state-run health insurance exchange, and many individuals currently covered by Medicaid will be better off with subsidized coverage from the exchange. To make them eligible for this coverage, Medicaid would have to shrink rather than expand.

Under the Affordable Care Act, individuals eligible for Medicaid cannot receive exchange insurance subsidies. Commercial coverage has historically provided better access to care than Medicaid, reimbursing physicians at significantly higher rates, making it easier to find a doctor, and making it easier to arrange for timely care. Medicaid coverage has long been an independent predictor of increased mortality, extended hospital stays, and higher costs. In some cases, Medicaid patients have worse outcomes than the uninsured.

Commercial policies may also do a better job of controlling health care expenditures at a given quality level. Unlike state Medicaid agencies, commercial insurers have detailed knowledge of how their individual policyholders consume medical care, and they use that knowledge to structure their policies in ways that give patients the incentive to use health care wisely.

Medicaid Drives Costs Higher

The rate at which Medicaid patients use emergency rooms for routine care is higher than that of the uninsured. Unlike Medicaid, private insurers have long charged more for emergency department use that does not lead to a hospital admission. Unfortunately, federal Medicaid rules are so complex that state Medicaid programs cannot imitate private plans. Texas studied the issue in 2008 and found imposing Medicaid rules made the implementation of emergency department copays complicated—to the point that such charges increased total costs.

Because Medicaid puts severe limits on the price that can be charged for care, clients frequently wait for everything, increasing the time price of care. This is especially burdensome for hourly workers who aren’t getting paid while they wait. Many low-income people would rather pay nominally higher prices for care than miss work.

When North Carolina’s Medicaid program reduced the allowable one-stop supply of Medicaid prescription medications from 100 days to 34 days and raised the copay from $1 to $3, raising the time cost led to a greater reduction in the needed drugs obtained by chronically ill patients than increasing the money cost.

Expansion Would Increase Costs

Even if the Affordable Care Act didn’t offer the opportunity to make many Medicaid clients better off by switching them to private insurance plans, Medicaid expansion makes little fiscal sense given Colorado’s difficult budget circumstances.

The 100 percent federal match through 2017 does not cover the state’s share of additional administrative costs. Nationally this averages $2.48 for each additional $100 of state administrative Medicaid spending. Once the expansion occurs, there is no guarantee the federal match will stay the same. The Obama administration’s 2013 fiscal year budget has already proposed reducing the federal match, which would substantially increase Colorado’s Medicaid expansion costs.

No Firm Cost Estimate

Finally, Medicaid expansion is a bad idea because the state does not yet have a firm sense of the cost increases the Affordable Care Act will cause in its current Medicaid program. There is no enhanced federal match for caseload increases in segments of the population that are currently eligible for Medicaid. Caseloads will likely increase because the mandate will encourage some fraction of the estimated one-third of the uninsured who are already Medicaid eligible but have not enrolled to enroll, and because people who are eligible but privately insured may lose their coverage as employers respond to ObamaCare incentives by changing working hours or dropping coverage entirely.

The Affordable Care Act is also likely to increase the demand for additional state subsidies for uncompensated care. Medicaid generates significant amounts of uncompensated care, so increasing Medicaid caseloads will add to uncompensated care burdens.

Finally, additional state support will likely be demanded by current Medicaid providers whose balance sheets begin deteriorating as a result of the substantial Medicare reimbursement cuts under the act—all of which serve to add to the potential costs of expansion.

Linda Gorman (linda@i2i.org) is director of the Health Care Policy Center at the Independence Institute.